Two Lease Negotiation Tactics That Save Tenants Tens Of Thousands

Business is high stakes and its definitely not a game so when I see financial statements and they show companies are overpaying for commercial leases a drill down on the lease always shows the culprit. Overpaying isn’t always a matter of bad luck, it’s often the result of avoidable mistakes. Whether you’re negotiating a new lease or a renewal, understanding how rent is structured, and the mechanisms that cause costs to quietly climb is essential to protecting your bottom line.

Here are the two most effective ways to avoid overpaying for rent, and how to put each into practice.

1. Structure Your Offer Based on Market Comparables, Not Feelings.

Emotions are the enemy of any negotiation. Discipline is by far the key ingredient in negotiating a lease that is advantageous to the business. In my experience many tenants fail before they even begin. They fall into the trap of offers. What’s this trap? It is when they offer what they feel is fair.

Entrepreneurs in particular, but real estate execs too, often react to a landlord’s asking rent, or they anchor an offer to old outdated market rents (nobody cares about the past), or somehow they use impaired logic that the aesthetic quality of a building is relevant to rent. Its an emotional driver that doesn’t translate well in lease negotiations. Commercial rents are not about emotions. They are about market evidence, and that evidence is current rent comps.

Before setting out to make an offer ask your representative to gather recent verified lease comparables for similar properties in the immediate area. Here’s what you want to focus on:

• Size and layout: 25,000 square feet of open warehouse space doesn’t lease like 25,000 square feet of office.
• Condition and amenities: Are you comparing newer, or renovated spaces to second generation and or functionally obsolete buildings?
• Term length: Shorter term leases tend to have higher rents, longer lower. Compare apples to apples.

If your target space is asking $1.95/SF NNN, but comps show deals closing between $1.50 and $1.75/SF in the same submarket, that’s your leverage. Use it. Present your offer backed by real data and frame your negotiation around market validity.

Making a low $1.10 offer and hoping for the best is not a strategy. Landlords respect data. They may not like you’ve come in with a price below their ask, but if it’s based on fact it yields credibility. This approach often unlocks options for more reasonable terms, which we discuss below.

Pro tip: Ask your broker (or hire one if you don’t have one) to secure bonafide lease comparables, or broker represented deal histories to substantiate the offer. Many experienced landlords will test asking rates well above market to gauge naïve tenants. Don’t be that tenant. And yes I have a words for those landlords too.

2. Watch Rental Increases Like a Hawk Looking For Pray

The rent you pay in Year 1 is only part of the equation. The silent EBITDA killer is often hidden in the annual increases.

There are two types that are common:

• Fixed Increases: e.g., 3%, 4%, 5% annual
• CPI Adjustments: pegged to an inflation index.

At first glance, a 3% annual increase may seem harmless. But over a 5 year lease, holly Toledo that increase can add up to an additional 15% in total rent, not including pass throughs or operating expense escalations, which increase overall occupancy expenses.

Even more dangerous is market based increases tied to “fair market rent” at the time of renewal, which are often left undefined. Without a clear formula or cap, this clause gives landlords near total control over your future rent burden to bear. Cannot begin to tell you how many entrepreneurs were surprised and impacted by this rent shock beginning it 2020. Many were forced out of business, or relocated to less costly markets often out of state.

Let’s get you squared away with a plan:

• Negotiate a cap on any CPI or market based increase. In exchange this often requires a “base minimum” so don’t be surprised. Ask your representative what today’s normal is.
• Flatten the rent where possible in soft markets. Very rare outside of short term leases.
• Request that any “fair market” adjustment is based on mutually agreed to third-party’s comparables, and include a dispute resolution clause that favors neutrality.

The entrepreneur will also want to confirm whether increases apply to base rent only or include additional rent components like CAM, taxes, or insurance. If you’re paying on a triple-net (NNN) basis, the operating expenses can increase dramatically over time, so they must be scrutinized closely as well.

Pro tip: Run a 5 year rent schedule before signing any lease. Look at the total cost of occupancy, not just the first year’s number, but all years. Many tenants overpay simply because they don’t calculate the compounding effect of rent increases over time. If it looks acceptable, gulp then sign.

My Final Thoughts

Negotiating a lease isn’t just about getting in the door as quickly as possible, another error topic for another article, it’s more about ensuring your long term occupancy is financially viable for your business. The biggest mistakes are atypically made by entrepreneurs because they negotiate off the cuff, failing to plan out a data driven strategy.

If you know me you’ve probably received my “plan to plan before your plan plain fails”, or my go to motto “the devil is in the details”. I personally would like to see you avoid overpaying so stick to market comps, without emotions, and by respecting that rent increases are like huge EBITDA bombs.

Christopher